The EUR/JPY currency pair retreated slightly during early Asian trading on Monday, posting modest losses around the 185.60 region. Despite this mild pullback, the cross remains well-supported above the crucial 100-day simple moving average, backed by bullish momentum signals on the Relative Strength Index.
Japan Inflation Data and Bank of Japan Policy Outlook
According to data released by the Statistics Bureau on Friday, Japan’s headline National Consumer Price Index inflation climbed to 1.9% year-on-year in July, accelerating from 1.6% in June and touching its highest level so far this year. Meanwhile, the core CPI, which includes energy items but strips out volatile fresh food prices, rose 1.8% year-on-year in July compared to the 1.6% prior reading. This latest economic report significantly reinforces expectations that the Japanese central bank will implement another interest rate hike.
Market participants have actively priced in roughly an 82% probability of a September rate increase as of late Friday, according to Bloomberg figures. This marks more than a threefold jump from the approximately 23% likelihood recorded immediately before the Bank of Japan’s July policy meeting.
Commonwealth Bank of Australia strategist Joe Capurso noted that remarks from officials might signal the central bank is moving closer to enacting another interest rate increase.
Conversely, analysts at Societe Generale suggest that the latest inflation figures should not prompt the Bank of Japan to accelerate faster than current market pricing indicates. Instead, they argue that the numbers clearly support the ongoing normalization path and their forecast for a September rate hike. In their publication titled 'On Our Minds: BoJ call change: quarterly rate hikes until next June', they reaffirmed that these metrics align with the existing trajectory rather than enforcing a harsher tightening cycle.
Technical Chart Analysis and Key Price Levels
On the daily chart, the EUR/JPY pair retains a bullish near-term outlook as prices hold firmly above the 100-day simple moving average and the Bollinger middle band. The asset is steadily advancing toward the Bollinger upper band, while the Relative Strength Index reading at 58.18 sits comfortably in positive territory without crossing into overbought extremes, indicating that upward momentum remains constructive.
On the downside, initial support is anchored at the 100-day SMA near 185.15, with stronger cushions located at the Bollinger middle band around 184.00 and the lower band down at 180.60. Looking upward, the Bollinger upper band at 187.35 represents the primary resistance barrier. A sustained breakout above this threshold would clear the way for a broader continuation of the established uptrend.
The Japanese Yen remains one of the most heavily traded currencies globally. Its valuation is fundamentally driven by domestic economic performance, central bank policy decisions, yield differentials between Japanese and US government bonds, and broader trader risk sentiment.
Currency management forms a core mandate for the Bank of Japan, making its interventions crucial for the Yen. Historical interventions by the bank have generally aimed at weakening the currency to support exporters, though such direct actions remain rare due to international trade sensitivities. The prolonged ultra-loose monetary policy maintained from 2013 through 2024 drove significant depreciation against major peers due to widening policy divergences. However, the recent unwinding of these accommodative measures has provided renewed backing for the Yen.
Over the past decade, the divergence between the Bank of Japan and major global counterparts like the US Federal Reserve widened yield gaps between 10-year sovereign bonds, favoring the US Dollar. The gradual abandonment of ultra-loose policies alongside easing cycles in other central banks is now slowly narrowing this yield differential.
Market participants frequently treat the Japanese Yen as a safe-haven asset, prompting capital inflows during periods of global financial distress and geopolitical tension, which typically strengthens its value against risk-correlated currencies.
Meanwhile, broader currency markets showed mild adjustments at the end of the week. GBP/USD held a defensive stance in the low 1.3600s after peaking past 1.3670 earlier in the session. EUR/USD hovered around 1.1670 following another failed attempt to sustain a break above 1.1700. Gold extended its stellar rally into Asian trading, touching three-month highs beyond $4,600 amid persistent US Dollar weakness and fresh trade tensions between the United States and Canada.
In central bank liquidity operations, the US Treasury announced plans to at least double the size of its liquidity support buyback program across the 10-year to 20-year and 20-year to 30-year sectors. Lifting maximum operations from $2 billion to at least $4 billion, the program runs from September 9 through November 4.
